3 reasons why the euro is trading at the highest level since March
The euro has been on an upward trend this week. The euro index, which measures the performance of the euro against a basket of currencies, rose by more than 1.35 per cent. It is trading at the highest level since March. The currency rose by more than 2 per cent against the dollar and by more than 1.30% against the pound.
Eurozone recovery fund
On Wednesday, the European Commission unveiled a $826 billion recovery fund for the eurozone economy. The funds will be raised in the bond market and be given as grants to member states.
According to the commission, the biggest recipients of the funds will be Italy, Spain, and France, which will receive more than €81.8 billion, €77.3 billion, and €38 billion, respectively.
The commission will recover the funds by adding targeted taxes. Some of the industries that will be affected will be the big tech and large industrial companies that emit the most carbon. It also expects to raise more than 10 billion euros from the carbon market.
The announcement came two weeks after Emmanuel Macron and Angela Merkel reached an agreement on the bloc’s financing. Previously, Germany was of the idea of giving this funding in form of low-interest loans.
Other eurozone states like Netherlands, Sweden, Austria, and Denmark are still opposed to the idea of giving countries grants.
Therefore, the euro rose because the uncertainty of the eurozone funding was removed.
Euro gains as the dollar weakens
The euro and the dollar are the two most-used currencies in the world. As I wrote a week ago, the US dollar has been sliding because business activity has been rising in other countries. The US dollar index declined by almost 2 per cent this week.
As this happens, investors who switched to the dollar during the peak of the pandemic in March started to go back to their local currencies.
Recent economic data shows that the eurozone economy is recovering. For example, survey data released by a company known as Markit showed that manufacturing and services activity rose in May. The same is true with other numbers like retail sales and inflation.
At the same time, many European countries have started to carefully reopen their economies. In a statement this week, Germany said that it will start opening its borders in the coming weeks. Other countries like France and Spain have said the same as the number of new infections fall.
Euro gains on talk of negative rates
In addition, the euro has gained because market participants have been talking about negative interest rates in the United States and the UK. In a statement last week, the Bank of England (BOE) governor said that the bank was assessing the impact of these rates.
While the Federal Reserve has ruled out against negative rates, market participants believe it will implement them in the December meeting.
Therefore, the talk of negative rates has boosted the euro, which is already in a negative interest rates environment.
Final thoughts
In the coming week, the euro will move depending on the strength of the data that will be released. These include the manufacturing and services PMIs and German employment. It will also move depending on the interest rate decision by the ECB on Thursday.
